16 November 2011

Tax Cut Politics Reviewed

Republicans in Congress opposed the successful efforts of Democrat John F. Kennedy to reduce the top marginal income tax rate from 90% to 70%.

Republican Ronald Reagan, in his 1986 tax reform, eliminated the preferrential treatment of capital gains taxes relative to ordinary income that had existed under prior law.

The principle reason that the rich pay lower tax rates than the poor is that capial gains and qualified dividends are taxed at lower rates than ordinary income. Currently, ordinary income is taxed at up to 35%, while long term capital gains and qualified dividends are taxed at up to 15%. The average tax rate paid by the top 400 taxpayers in the United States is 17%, down 40% from what it was in 1997 and far below that of the average American.

Republican Newt Gingrich was behind the reduction of the capital gains tax rate to a maximum of 20% in 1997. It was reduced to 15% a few years later.

Since 1997, the average income of people in the bottom 90% has increased by a dollar and change per hour, and less adjusted for inflation. The incomes of those in top 1% and even more so the top 0.1% have risen dramatically in the same time period.

Starve the beast, all taxes are bad, and a strong commitment to taxing earned income more heavily than investment income policies are a relatively new addition to the Republican playbook, from the post-Reagan era.

Current Republican dogma on taxation is bad policy. Capital gains and dividends and other forms of investment income are undertaxed. Undertaxation of investment income by definition make the people who already have wealth more wealthy. This undertaxation of investment income drives federal government budget deficits that are bad for the economy. This undertaxation of investment income plays favorites by industrial sector which skews economic decision making to favor investment speculation over honest work, and encourages businesses to employ too few people. Federal government budget deficits are the single biggest driver of the trade deficit.

The main source of this post was a Fresh Air interview on NPR this morning.